Income Statement

• what is an income statement?

  1. it describes the income and expenditure of a business over a period of time, usually a year
  2. it shoes the profit or loss made by the business
  3. it’s also known as the profit and loss account
• sections of the income statement

  revenue - turnover or sales income generated from sales

  cost of sales - costs linked directly to the production of the product or service

  gross profit - revenue minus cost of sales, shows how efficiently a business is converting its raw materials into finished products

  expenses - indirect costs that are not directly related to producing the product or service

  operating profit - gross profit minus expenses, profit earned from normal trading activities
• sections of the income statement

  exceptional items - items that have a one-off effect on profits

  finance income - any interest paid to the company on money lent or saved

  finance expenses - any payments of interest on loans held

  profit before tax - operating profit minus finance expenses plus any finance income

  profit for the year - profit before tax minus taxation
• purposes of the income statement

  1. to measure company performance and the impact of strategies
  2. owners can assess their return on investment
  3. to abide by legislation as part of being a limited company
  4. gives an idea for profit quality
  5. used to compare with other firms and past trends
• profit quality

  high quality profit - source of profit is like toy to continue in the future

  low quality profit - result of actions that are unlikely to occur again
• profit utilisation 


  1. dividends paid to shareholders
  2. retained profit
• dividends paid to shareholders

  companies will decided at the end of every financial quarter whether to pay dividends or not from any profit they have made, this is decided by the board of directors
• retained profit

  board of directors will decide to retain profit to reinvest in the business to maintain its liquidity, fund its strategies and to invest in future expansion and capital investment